▲ Financial Supervisory Service
The Financial Supervisory Service (FSS) is reviewing improvement measures following criticism that the banking sector's exchange-traded fund (ETF) trust fee structure fails to adequately reflect customer interests.
The FSS issued a "Caution" consumer alert today regarding bank ETF trust transactions and provided guidance on precautions.
According to the FSS, ETF sales by six major banks totaled 64 trillion won (1.03 million transactions) from last year through May of this year.
Sales in May of this year (10.8 trillion won) surged 8.8 times compared to December of last year (1.2 trillion won).
The FSS noted that holding periods are short (averaging 42 days), contracts are frequent (an average of 5.5 times per person for the same individuals since January of last year), and short-term trading trends have intensified this year.
Despite the fact that the vast majority of ETF trades involve selling within six months (94.6%), upfront fees—which are disadvantageous for short-term trading—accounted for 91.7% of transactions, the FSS pointed out.
Upfront fees are paid once upon subscription (around 1%), while back-end fees (around 1% annually) are paid on a pro-rata basis upon termination. Therefore, the shorter the ETF holding period, the more advantageous back-end fees are.
Upfront fees are only advantageous when the investment period exceeds one year.
In addition, low target return rates can lead to frequent trading and heavy fee burdens.
According to the FSS, a large number of accounts (58.1%) were set with target returns of 5% or lower, while a significant portion had excessively low targets such as 3% or 1% or lower (20.8% and 1.1%, respectively).
The FSS stated, "As consumers set lower target return rates, frequent trading occurs, and choosing upfront fees increases the burden of charges, compounding losses through the loss of investment opportunities on the portions paid as fees."
According to the FSS, during the same period, the capital gains of ETF trust customers at the six banks stood at 2.91 trillion won, with trust fee revenue recorded at 394.8 billion won (13.6%).
The FSS pointed out, "While the burden of losses from stock price declines rested on the customers, banks collected 14% of customer profits as fees through frequent trading and upfront fee collection."
It added that the combination of upfront fees and low target return rates resulted in banks collecting fees amounting to 7.2 times the optimal trust fees for customers.
Assuming customers had chosen the optimal trust fees, the trust fees collected by the banks would have been 54.5 billion won.
The FSS noted that amid increasing transactions by vulnerable investors such as the elderly, consumer fee burdens are growing due to a rise in short-term trading and upfront fees.
Furthermore, the FSS advised that because bank ETF trusts incur higher transaction costs, such as trust fees, compared to direct trading through securities firms, they may not be suitable for short-term repetitive trading.
Investors should also keep in mind that even when subscribing through a bank, ETF trusts do not guarantee principal, and ETFs cannot be traded in real-time through bank trusts.
The FSS plans to form a task force (TF) with the industry and associations to discuss improvements for trust-related fee structures including ETFs, internal bank key performance indicators (KPIs), and sales procedures.
It plans to discuss the overall trust fee structure from scratch—including upfront and back-end fees, early termination fees, and trading commissions—and consult on measures to ease the burden on financial consumers.
It will also examine whether the formulas and weightings of "customer investment return" indicators, which most banks reflect in their KPIs, are appropriate.
The FSS stated that it will establish enterprise-wide sales strategies aligned with the investment objectives and periods of different customer groups, such as asset levels and age brackets, and prepare measures to improve sales procedures so they are applied consistently across frontline branches.
(Photo: Yonhap News)
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